Economics: What are the Factors Affecting Demand and Supply?

Demand and supply is an economic model that determines the prices of goods in a market. Demand is exercised by consumers willing to purchase products or services. Supply is the response to that need of the consumers. Both activities are influenced by economic developments in the domestic environment. Such factors are inflation, unemployment, prices of commodities and international trade.

Inflation. Inflation is the increase in the prices of goods in an economy, while the income of people remains unchanged. It affects the demand and supply because with increasing prices of production, the buying capacity of people decreases. For example, Bloomberg indicates that the increased prices of production in the U.K. has affected the population in the country. The Bank of England had reported that the prices of properties are dropping as supply outpaced demand. People exercise reduced property demand as the increased inflation limits their buying capacity.

UNEMPLOYMENT. When people are unable to practice a profession, they are deprived from income. The lack of finance in a household limits significantly the demand that people exercise. The higher the unemployment rates, the lower the demand for production. Supply, at the same time might outreach demand as production remains unsold. This is how unemployment might result in overproduction as companies would continue producing in order to compete on the market, but the reduced demand would limit their sales.

INTERNATIONAL TRADE. International trade is among the most important factors in demand and supply because through import of goods, domestic economies respond to the request for production exercised by society. Thus, goods which are not produced in the country can be imported from other destinations. When the international trade with other destinations is disrupted, a country might suffer over-demand and insufficient supply. For example, during the domination of the Soviet Union in Eastern Europe in the late 1980s, countries could not trade with Western producers. This led to an increased demand for production such as electronics and sportswear, and insufficient supply of these products as countries are politically restricted from participating in the global trade with Western destinations.

COMMODITIES. As commodities increase in value, the prices of production increase. This affects the demand and supply significantly because, just like inflation, such a process might undermine the request for goods. For example, the increased prices of gold have led to a reduced demand for gold jewelry in Eastern Europe where the price increase was felt at its strongest. However, the increase in the value of commodities, which are heavily relied upon, might not change the demand and supply. For example, despite the rising prices of oil, people and companies continue to exercise strong demand for fuel as these resources are vital for transportation and energy production.

References: Random Sites